The Ministry of Economy and Finance and the Bank of Korea held their respective events on the state of the national economy just one day apart last week. The ministry unveiled its first full-year budget plan under the Lee Jae Myung administration, while the central bank outlined its monetary policy outlook.

Taken together, however, the announcements offered little confidence in the coherence of South Korea’s economic policy and more evidence that both institutions are prioritizing short-term considerations and political sensitivities over long-term stability.

The Finance Ministry drafts budgets and manages public finances, while the central bank sets interest rates and works to stabilize the financial system. But they ultimately share the same purpose: guiding the economy toward maximum sustainable growth while preserving its soundness.

Unfortunately, last week’s announcements revealed troubling signs of divergence. Both institutions accurately identified South Korea’s most urgent economic challenges: sluggish growth, intensifying technological competition and structural vulnerabilities in an export-dependent economy. Yet their chosen remedies and the assumptions behind them inspire little confidence.

The 2026 budget proposal is viewed as a reflection of President Lee’s economic philosophy. Lee described the economy’s main challenge as twofold: first, to drive industrial innovation in areas like artificial intelligence and advanced technology; second, to reduce the nation’s exposure to external shocks by strengthening its foundations.

In response, the government proposed a sharp increase in spending on AI and broader R&D initiatives. Allocations for AI would more than triple, with parallel boosts to research across multiple sectors. In principle, this renewed commitment is welcome, particularly after years of underinvestment that left South Korea trailing its rivals. Yet here is where the devil truly reveals himself — in the details.

The government plans to expand spending by 8.1 percent in 2026, while revenue is expected to rise by only 3.5 percent. To cover the gap, it will rely on heavy borrowing, issuing bonds worth 141.8 trillion won (about $102 billion). This would push national debt to 51.6 percent of gross domestic product by 2026, breaching the symbolic 50 percent threshold for the first time in South Korea’s history. By 2029, the debt ratio is projected to climb to 58 percent.

Some argue that South Korea’s debt ratio remains low compared with many advanced economies, which sustain levels well above 100 percent of GDP. But this comparison is misleading. The real concern is not the absolute level but the trajectory. A debt burden that rises steadily without a credible containment plan is a ticking time bomb. It signals to markets that the government is willing to leave repayment to future generations.

Even more troubling is the absence of fiscal discipline outside the innovation sphere. The government expanded allocations for non-urgent sectors, squandering an opportunity to reprioritize. At a moment when restraint is needed, the government is loosening the purse strings broadly rather than selectively. Such choices weaken the credibility of the innovation drive itself, because without fiscal sustainability, even the most forward-looking investments risk being overshadowed by fears of mounting debt.

This fiscal stance leaves the Bank of Korea in a difficult position. Gov. Rhee Chang-yong indicated that monetary policy is geared toward supporting rate cuts through at least mid-2026, reflecting concern about anemic growth. With the economy likely to expand by less than 1 percent this year — its weakest peacetime performance in modern history — the case for stimulus is clear.

Yet the surge in government borrowing will push up bond yields, blunting the impact of any rate cuts. The central bank could lower policy rates to encourage borrowing, but markets may not respond because fiscal borrowing keeps yields elevated. The two policies risk working against each other.

Housing prices in Seoul

Adding to the problem is the central bank’s continued fixation on housing prices in Seoul. Rhee justified delaying rate cuts to avoid fueling speculation in the capital’s real estate market. This stance is deeply questionable. For one thing, it treats Seoul’s housing market as the barometer of the national economy. For another, it ignores the broader slump. Construction firms are suffering, employment is weakening and consumer confidence is fading — yet the central bank resists adjustment out of fear of igniting demand in a single city.

By the time housing prices in Seoul cool naturally, it may be too late. Rate cuts implemented at that point would have little impact on an economy already in deep recession. Worse, they would collide with a fiscal environment defined by aggressive government borrowing, further limiting their effectiveness.

The paradox is striking: While the government borrows heavily to finance expansion, the central bank holds back, waiting for a real estate signal that may arrive only after the broader economy has already deteriorated.

In short, the Finance Ministry is borrowing into a corner in pursuit of growth, while the central bank is hesitating to act decisively for fear of housing bubbles in Seoul. Both are misaligned with the economy’s immediate needs. The ministry should have shown greater fiscal discipline, concentrating on innovation while restraining non-essential spending.

Instead, it has opted for broad expansion funded by debt. The central bank, meanwhile, should focus on stabilizing growth and financial conditions rather than tying its policies to the volatile property market of a single metropolitan area.

South Korea needs strategies rooted in realism, discipline and coordination. Innovation spending must be paired with credible debt management. Interest rate policy must reflect national conditions, not the housing market of one city.

The central bank must summon the courage to act decisively in the face of slowing growth, even at the risk of political criticism over housing prices. Above all, both institutions must rediscover their shared purpose: ensuring maximum sustainable growth while keeping the economy sound. Without coherence between fiscal and monetary policy, South Korea risks drifting into a future where debt rises, growth stalls, and confidence erodes.

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as the chief Korea economics correspondent, and briefly worked as a business strategy consultant. The views expressed here are the writer’s own. — Ed.

khnews@heraldcorp.com